Apollo Hospitals is a healthy option for long-term investors. Here's why

Expansion potential in digital platform, steady growth in traditional business and value unlocking in pharmacy segment are key positives

Apollo Hospitals Enterprise Limited (AHEL) has beaten expectations with its Q1, 2021-22 results. Consolidated Operational Income was Rs 3,760 crore, ahead of Rs 2,172 crore year-on-year (YoY) and ahead of Rs 2,760 crore in Q4, 2020-21 (quarter-on-quarter or QoQ). Ebitda was Rs 520 crore, comfortably ahead of Rs 35.5 crore (YoY) and ahead of Rs 390 crore (QoQ). The reported PAT was Rs 195 crore, versus a loss of Rs 208 crore (YoY) and Rs 130 crore (QoQ). The EBITDA margin was slightly lower than in Q4. There are lower margins in vaccination and costs related to the 24x7 AHLL initiative.

Segment-wise, Hospitals contributed Rs 1,939 crore while Pharmacy contributed Rs 1,512 crore. This was growth of 35 per cent QoQ in the Hospitals segment and 34 per cent growth in the Pharmacy segment. JVs contributed Rs 20 crore, slightly less than Rs 21 crore QoQ. Revenue of existing hospitals grew 134 per cent while the new hospitals grew by 175 per cent, on a YoY basis. The front-end of the Pharmacy business was demerged from September 1, 2020. AHEL continues to handle the back-end pharma distribution. The demerger makes the current quarter not comparable. Adjusted for front-end transactions, growth was at 43 per cent YoY.

Apollo Health & Lifestyle Limited (AHLL) is a wholly owned subsidiary that houses the retail healthcare business of Apollo Hospitals. The AHLL network has 1,239 centres and AHLL Consolidated Revenues grew to Rs 309 crore in Q1FY22 compared to Rs 102 crore (YoY). EBITDA for AHLL was at Rs 48 crore in Q1FY22 versus a loss of Rs 2.7 crore YoY. Apollo 24X7 is India’s largest Omni-channel healthcare platform. It networks with neighbourhood pharmacies to deliver orders in under 2 hours in over 17,000 pin-codes and it enables turnaround of RT-PCR test results in under 24 hours as well as virtual consults with specialists. The platform now has about 2 million weekly active users with 4-5,000 teleconsulting per day and over 10,000 e-pharmacy orders per day. The guidance is $50-60 million equivalent revenue from the platform in FY2022.

All segments benefitted from Covid impact, with vaccinations (Rs 190 crore revenue contribution), RT-PCR tests and Covid patients driving growth. Mature hospitals grew 20 per cent QoQ, in line with estimates while new hospitals grew 40 per cent QoQ.

The YoY comparisons are difficult due to the low base caused by the lockdowns. Margins appear to be healthy. Total debt was reduced substantially by deleveraging in 2020-21, and in Q1, 2021-22. The deleveraging is expected to continue. The Net Debt:Equity ratio was 0.8 at March-end 2021, and expected to drop to 0.5 by March 2022. Assuming these growth rates can be maintained, some analysts expect Revenue to rise by approximately 40 per cent in FY 2021-22 and another 15 per cent in 2022-23. EBITDA margins could be around 14-15 per cent through the next two fiscals.

The long-term outlook seems good. AHEL has built a big brand name and it has a pan-India presence. The digital platform has expansion potential while the traditional business is also growing fast. The spin-off of the pharmacy business and Apollo 24X7 into a separate subsidiary, Apollo HealthCo, could be followed by acquiring investors for those segments. Downside risks would include more competition, and delays in elective surgeries, which have high margins. The stock hit a new high on the results and most analysts have maintained their Buy or Add ratings.